Report Release: An Investor’s Guide to Calculating and Presenting Deep Retrofit Value
How did Sharp Development measure the success of its deep retrofit investment of a 1970s-era Class C building in Silicon Valley? Although energy efficiency was important, what mattered more was the decreased lease-up time and increased rent.
Similarly, the International Monetary Fund (IMF) measured the success of the deep retrofit of its Washington, DC, headquarters by the retrofit’s ability to reduce the risk of failing equipment, avoid a downgrade in market value, and bring the building up to code compliance. For Caisse des Dépôts et Consignations (CDC), it was the expected 10 percent asset value increase to a 1930s-era building in Paris. For Malkin Holdings, it was the avoidance of millions in planned capital costs for the Empire State Building. For Hilton, it was the increased net operating income and property value as well as improved customer experience at its Universal Studios-Los Angeles hotel. And for the Rose Smart Growth Investment Fund, it was the boost in occupancy from 68 to 96 percent at the Joseph Vance Building in downtown Seattle.
These stories corroborate strong market evidence that energy cost savings—while significant—represent just one driver motivating investment in deep energy retrofits.
Nevertheless, real estate investors generally neglect the value beyond energy cost savings that these stories highlight when they prepare and present capital requests for deep retrofits. The result: undervaluation of deep retrofit opportunities that leads to (unintended) underinvestment in efficient buildings, leaving millions on the table (and increasing carbon emissions in the atmosphere). Incorporating the additional—albeit less tangible—value beyond energy cost savings into decision making is therefore critical to improve investor due diligence, enable better assessments of the value proposition for deep retrofits, and in turn unlock needed capital.
This is where RMI comes in. We are working to equip investors with practical guidance to incorporate all value beyond energy cost savings into their decision making and capture higher returns from these investment opportunities. The goal is to scale investment in deep retrofits and reduce buildings’ contribution to climate change.
A methodology for investors
Last week, RMI released a new practice guide for real estate investors to capture all value beyond energy cost savings resulting from the execution of a deep retrofit project. The guide provides a comprehensive deep retrofit value methodology and complements the 2014 guide RMI produced for owner-occupants.
Like the 2014 guide, we engaged industry stakeholders for their input and review. James Gray-Donald, VP of sustainability of Bentall Kennedy and project lead of the United Nations Environment Programme Finance Initiative (UNEP FI) Property Working Group, described the report as follows:
A must read for those serious about the pathway to portfolio decarbonization in commercial real estate. Investors, particularly large pension funds, are increasingly wanting their portfolios to have a lower carbon footprint, while maintaining best-in class financial returns. RMI’s Deep Retrofit Value practice guide clearly shows that reducing carbon intensity does not require a reduction in financial returns. Indeed it is a compelling guide for how energy upgrades can be justified to go much deeper than previously thought.
The key to going deeper is calculating and presenting five key sources of value beyond energy cost savings. This leads to better-informed decisions about retrofit opportunities that can drive greater retrofit investment.
The guide shows the importance of the five particular value elements listed below and how to incorporate them into decision making:
- Retrofit Capital Costs—Retrofit projects can have little cost premium if timed with other capital improvement projects and if they take advantage of subsidies and other financial incentives.
- Non-energy Operating Costs—Deep retrofits can reduce operating costs associated with maintenance, insurance, and occupant churn rate as well as increase occupied space through equipment downsizing and improved occupant use of space.
- Tenant Revenues—Retrofits can enhance demand, resulting in increased rents, occupancies, absorption, and tenant retention.
- Sales Revenues—Sales revenue premiums from deep retrofits result from higher net operating income, increased investor demand, and risk reduction.
- Retrofit Risk Analysis—The thorough identification and evaluation of risks enables action to mitigate and accurately price them, helping to maximize value from the other value elements.
The practice guide concludes with a sample report that demonstrates how an investor can prepare a compelling presentation of deep retrofit value to decision makers. The sample report illustrates the impact of using—or neglecting—a deep retrofit value methodology on the outcomes of investment decisions.
Direct industry collaboration to scale deep retrofit investment
RMI is empowering industry stakeholders with the skills and resources they need to capture the higher returns of deep retrofit investments. We are holding workshops, creating professional training programs, and engaging directly with investors to put the deep retrofit value methodology to the test and promote its use.
In February 2015, we held a Value of Zero workshop for 75 real estate professionals to explore and develop business-led strategies to accelerate investment in real estate portfolios that advance toward net-zero energy. Participants recorded and shared how they plan to apply insights from the workshop in their everyday work to increase investment in building energy performance.
We are working with the Institute of Real Estate Management (IREM)—whose Certified Property Managers (CPM) manage over 13 billion square feet of non-residential real estate worth over $800 billion in asset value—to develop three deep retrofit value online courses and an accompanying tool based on the new practice guide. The courses will show portfolio managers, property managers, asset managers, project managers, and others in the investment real estate industry how to analyze the financial impact of energy retrofits and make a compelling case to move projects forward with owners, investors, and other stakeholders. They will also qualify for state-licensed continuing education and other mainstream accreditations. RMI and IREM are partnering with real estate investor organizations to train and enroll staff in these courses as they are released over the coming months to support the integration of RMI’s deep retrofit value methodology into investment decisions.
Moving forward, we want to add to the real-world examples of leaders taking values beyond energy cost savings into account during their retrofit decision making. These examples further build confidence in the methodology and will lead to increased energy efficiency investment. Please contact us if you have already taken these values into account, are interested in piloting the methodology, or would like to hear more about RMI–IREM courses.